MB103 ACCOUNTING FOR

BUSINESS DECISIONS

PROF. INDRAJEET BHARAT KOLE

 Syllabus
Unit 1: Introduction to Accounting: Definition of Accounting, Scope of
Accounting, Basic Accounting Terminologies, Accounting concepts and
conventions, Users of Accounting Information, Accounting Equation (including
problems), Financial A/c Vs Management A/c, Cost Accounting Vs Management
Accounting.
Unit 2: Accounting Cycle: Classification of Accounts as per Modern Approach,
Preparation of Journal, Ledger, Trial Balance and Final Accounts, Problems on Final
Accounts of Sole Trader with adjustment entries.
 Syllabus
Unit 3: Corporate Reporting: Preparation of Income Statement and Balance Sheet as
per Schedule III of the Companies Act 2013. Analysis of Chairman’s report.
Unit 4: Introduction to Cost Accounting: Limitations of Financial Accounting,
Meaning of Cost, Cost Accounting, Cost classification, Special Cost for management
decision making, Elements of cost, Preparation of cost sheet.
Unit 5: Decision Making Techniques: Meaning of Marginal costing, Characteristics of
Marginal Costing, Calculation of: BEP, Margin of Safety, P/V ratio, Budgetary Control:
Meaning, process, functional & flexible budgets. Problems on Cash Budget.
 Meaning and Definition of Accounting:

Accounting is a part of our life. Whatever may be our profession,

willingly or unwillingly we do accounting in every step of our life.
Business Accounting, however, is a more serious matter it requires
systematic and chronological record keeping of all monetary
transactions which happen in business and require analysis of all
those transactions for making necessary business decisions.
 Definition of Accounting:

Accounting is defined as “ the measurement and communication of financial and

economic data”.
The science of accounting is still in the evolutionary process. Accounting can be
defined as also “ The art of recording mercantile transactions in a regular and
systematic manner so that a person can know the true state of his business and
property by an inspection of his books”.
Accounting, as such, can be defined as a" System of collecting, Recording,
Analyzing and Reporting information about a business in monetary terms”.
 Parties or Users interested in Accounting:

Persons normally interested in the accounting information of a business are:

➢ Proprietor/partner/Shareholder commonly known as owners: They are basically
interested to know the profitability, financial position and also the financial soundness of
the business.
➢Management’ represented by Managers: The managers remain responsible for
efficient performance of day today activities of any business. They do commit certain
performance of the owners. To ensure that their commitments are achieved, the managers
are to check the accounting information of the business.
 Parties or Users interested in Accounting:

➢Financial Institutions, Banks, Sundry Creditors and other Lenders commonly

termed as Long and Short term lenders: They are the people to whom the business
organization owe the money. That these people give credit to the business
organization is a risk. To asses the degree of risk based on the liquidity of the
business, accounting information's are required by these people.
➢Prospective Investors: Falls in the category of the owners. Like owners they are
interested to know the profitability, financial position and also the financial
soundness of the business.
 Parties or Users interested in Accounting:

➢Government and Regulatory Agencies like SEBI, Registrar of

Companies etc.: Government is interested from the point of the view of both
direct and indirect taxation. Regulatory Agencies are mostly concerned with
the proper compliance of statutory requirements.
➢Employees: They are interested in the job security and future growth of the
business. Sharing of profit/Bonus is another factor of their interest for
referring to the accounting information.
 Parties or Users interested in Accounting:

➢Society : Better the performance; better is the employment opportunity.

Society shows interest to know the performance of the organization to
assess the economic growth, employment scope in the future etc.
➢Researchers: Researchers need financial data for analyzing financial
hypothesis and development of theories, models etc.
 Branches of Accounting:

1. Cost Accounting: Cost is the vital factor determining business decisions. A variety
of costs are incurred by business. The accountants who specialize in finding out the
costs and help accounts to utilize these costs, are called Cost Accountant.
2. Financial Accounting: Transactions of the past are recorded in systematic and
chronological manner to prepare the financial statements and these financial
statements reveal the financial performance of the organization. He specialist who
maintain these accounting records and prepare ultimate financial statements is called
Financial Accountant.
 Branches of Accounting:

3. Management Accounting: Management Accounting is the

presentation of financial data as a part of the information task of
management decision and control. The specialist who compiles and
present these data to the management is called Management
Accounting.
 Accounting Concepts:
1. Business Entity Concept: Business is regarded as distinct unit or entity from
its owner. As business & businessman are two separate entities.
2. Money Measurement Concept: In accounting only those things which can be
expressed in terms of money are recorded to give a meaningful information. As
money is accepted not only as a medium of exchange but also a store of value.
3. Going Concern Concept: This principle indicates that accounting is made on
the assumption that a business will continue in future and will use its assets in
operations rather than selling them.
 Accounting Concepts:

4. Cost Concept: It implies that the resources of a business are to be recorded at

their cost. The market price, realizable value etc. should not be considered
while recording the transactions in the books.
5. Accrual Concept: In accrual the revenue is count to the period in which it was
realized ( rather than received) and the cost applied to the period benefiting
from the services ( rather than when paid) In other words- the outstanding/
prepaid perceived expenses and incomes are considered under this concept.
 Accounting Concepts:
6. Materiality Concept: Materiality concept holds that item of small
significance need not give strict theoretically correct treatment. In other words
the cost of accounting of a transaction is not more than the amount of
transaction.
7. Consistency Concept: There are different accounting policies and methods.
Different business firms follow different policies and methods or certain rules
and assumptions. In order to make the result of one year comparable with
those of other years, the basis should not be changed.
 Accounting Concepts:
8. Periodicity Concept: According to this assumption, the life of an
enterprise is divided into arbitrary period for preparing final accounts.
9. Dual Aspect Concept: All business transactions are regarded as having
a dual aspect. The balance-sheet shows the financial position of the
business at one point of time. It's Right hand side represents the assets
being used by the business and left hand side represents the sources of
these assets.
 Accounting Conventions:
1. Conservatism: The first convention is that “Anticipated no profit and provide for all
possible losses”. This indicate that think and provide for all probable losses and expenses
but do not credit any probable future profit. On this basis, closing stock is valued at cost
or market price whichever is lower, creating a provision for doubtful debts, a provision
against fluctuations in the prices of investment and the profit is not credited unless it is
realized , are all based on the conservatism.
2. Consistency: Accounting policies, methods, rules, and practices should remain
unchanged from one year to another year. Then only the result of a business concern can
be compared from one year to another.
 Accounting Conventions:
3. Materiality: Materiality means the relative importance and is related to the convention of
disclosure. Disclosure is necessary in financial accounts only for material facts.
Materiality is of two kinds- materiality of information and materiality of accounts. This
principle refers to the significance of transactions. The cost of accounting of a transaction
is not more than the amount of transaction.
4. Disclosure: All the material facts should be disclosed in the final accounts. In fact, the
Companies Act has made several provisions for disclosure of essential information in
Final Accounts. The object of disclosure is to make the financial statements more useful
and to give less scope for misinterpretation. This will help the readers of financial
statements to understand the performance of the business correctly.
 Definition of Management Accounting:-
❖“Management Accounting is the term used to describe the accounting
methods, system and technique which coupled with special knowledge and
ability, assist management in its task of minimizing losses.”
- J. Batty.
❖“Management Accounting is concerned with providing information to
managers that is to those who are inside the organization and who are
charged with directing and controlling its operations”
- R. H. Garrison.
 Nature of Management Accounting

1. Useful in decision making

2. Financial and Cost Accounting information used in management accounting
3. For Internal use only:- Management accounting information is for internal
use only
4. It is used as per Management needs.
5. It is used for future course of action.
6. The information is presented to Management which is simple to understand.
Comparison of Financial Accounting and
Management Accounting

Basis Financial Accounting Management Accounting

External users like share holders,

Users creditors, government and Banks etc. For Internal Management only

Accounting
Double Entry book keeping Only information
method
Legal Companies Act, Tax-laws require
No such legal requirements
requirement financial information
Analysis of
Shows the profit/loss of the business as a It provides detailed information about
cost and
whole products, plants departments, etc.
profit
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Comparison of Financial Accounting and
Management Accounting
Basis Financial Accounting Management Accounting

Past &
It gives only past or historical data It gives what is likely to happen in future
Future Data
Reports are prepared frequently i.e. daily,
Reporting Profit and Loss and Balance, Sheet
weekly, monthly, quarterly, half- yearly as
prepared at the year end
per the need.

Accounting Prepare accounts as per accounting

Not bound by any accounting standards
Standards standards

General purpose statements like P&L

Types of Special purpose reports are also prepared
account and Balance sheet for external
statements which are used by top management
use.
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Comparison of Financial Accounting and
Management Accounting

Basis Financial Accounting Management Accounting

P&L Account and Balance Sheet are Management Accounting reports are for
Publication &
Audit
audited by Chartered Accountants internal use hence not audited and
and published for general public published

Monetary & Non Provides Monetary and Non Monetary

Provides information in terms of
Monetary units of measurement. eg units, machine
Measurements money only
hours, labour hours, etc.

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 Comparison of Cost Accounting and
Management Accounting
Basis Cost Accounting Management Accounting
Limited to providing cost information to Provides all type of information i.e. Cost accounting ,
Scope
management. Financial accounting, etc
On Cost ascertainment and cost control to On planning, controlling and decision-making to
Emphasis
ensure maximum profit maximize profit

All the techniques used in addition it also uses techniques

Used for standard costing and variance
Techniques like ratio analysis, statistical analysis, operations research
analysis, marginal costing & cost, uniform
employed and certain techniques from various branches of
costing & inter-firm comparison, etc.
knowledge like mathematics, economics, etc.

Due to the limitations of cost accounting, In fact

Mainly due to the limitations of financial
Evolution management accounting is the extension of the managerial
accounting
aspects of cost accounting

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 Comparison of Cost Accounting and
Management Accounting
Basis Cost Accounting Management Accounting

Maintenance of cost record has been made

Statutory Purely voluntary and its use depends upon its
compulsory in selected industries as notified
requirements utility to management.
by the Govt. from time to time

Based on data derived from financial Based on data derived from cost accounting,
Data base
accounts financial accounting and other sources.

In the organizational set up, it is placed at a

Status in Is generally placed at higher level of hierarchy
lower level in hierarchy than the management
organization than the cost accountant
accountant.

Cost accounting system can be installed Cannot be installed without a proper system of
Installation
without management accounting cost accounting

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 Basic Accounting Terminologies:

1. Transaction: An exchange of goods or services either for cash or an a credit basis

is called as a transaction. A transaction requires a minimum of two parties.
2. Entry: Entry is record of a transaction in account books. It forms the very basis,
for writing the books of accounts.
3. Account: An account may be defined as a summarized record of all the
transactions relating to any particular person or any class of income or loss, which
has been entered in during a given period of time.
 Basic Accounting Terminologies:

4. Head of Account: Head of the account is the name or title of the account.
5. Books of original Entry: Books of Original entry are those books in which the
entries are first recorded. These books are also known as “ the books of prime
entry.”
6. Narration: When an entry is passed, it has to be followed by an explanation or
description of the transaction or entry. This explanation of an entry is called as “
Narration”. It is required to give it just below the entry.
7. Journal: A journal is the book of daily record of all transactions are recorded in
chronological order.
 Basic Accounting Terminologies:

8. Goods: the term goods is used for the articles or things in which a trader trades.
9. Folio: It means the page number of the articles or things in which a trader
traders.
10. Ledger: The ledger is the chief books of accounts. It denotes the bound volume
of accounts. It includes personal and impersonal account.
11. Debit side: It refers to the left hand side of an account.
12. Credit side: It refers to the right hand side of an account.
 Basic Accounting Terminologies:

13. To Debit: It means passing entry on the debit side of an account.

14. To Credit: It means passing entry on the credit side of an account.
15. Posting: Transactions entered in the original books of entry are also to be recorded
in the ledger. An act of recording the transaction in the ledger on the basis of the
entry made in the original books is called posting.
16. Capital: capital is the total amount invested in the business by the proprietor. the
capital of a business is the claim of the owner to the business profession. In the
accounting sense, capital is the excess of assets over liabilities.
 Basic Accounting Terminologies:

17. Drawing: Drawing is the withdrawal of money or goods by the proprietor

from his business out of capital or out of profit for private purpose.
18. Assets: all the properties, possessions and debit owing to a business house are
known collectively as assets.
19. Liabilities:- Capital of the proprietor and the debts which are due by the firm,
to other parties are known collectively as liabilities.
 Basic Accounting Terminologies:

20. Expenses:- It means the expenditure whose benefit has been received and which
belongs to the period under accounts. It is the amount spent on manufacturing
and selling of goods and services.
21. Income: Income or gain is the amount received in return of the service rendered.
22. Stock: Goods unsold lying with a business on any given date are called stock.
23. Discount: An allowances given on the sales price of goods. There are two kinds
of discounts viz, Trade discounts and cash discount.
 Basic Accounting Terminologies:

24. Bad Debts: Debts which are irrecoverable are termed as bad debts.
25. Debtors: A person who owes something he is a person who has to pay to
other person.
26. Creditors: A creditor is a person to whom we owe something, he is the person
to whom we have to pay.
27. Person: The term person includes not only individuals but also institutions
like firms, companies, banks, co-operative societies etc.
 Accounting Equation:

Accounting Equation signifies that the assets of a business are always

equal to the total of its Liabilities and Capital(owner’s equity).

Assets = Liabilities + Capital

OR
A = L+ C
 Fundamental of Accounting Equation

❑Total Assets = Total Equities

❑Assets = Internal Equity + External Equities

❑Assets = Capital + Liabilities

 Problem No. 1

What will be effect of the following on the Accounting

Equation?
(i) Started business with cash ₹ 45,000
(ii) Opened a Bank Account with a deposit of ₹ 4,500
(iii) Bought goods from M/s. Sun & Co. for ₹ 11,200
 Problem No. 2
Develop an Accounting Equation from the following transactions:

Sr. No. Transactions Amount Rs.

1 Mohan commenced business with cash 50000
2 Purchased goods for cash 30000
3 Purchased goods on credit 20000
4 Sold goods for costing Rs. 10000 for 12000
5 Bought furniture on credit 2000
6 Paid cash to creditor 15000
7 Salary Paid 1000
 Problem No. 3
Develop an Accounting Equation from the following transactions:
Sr. No. Transactions Amount Rs.
1 Started Business with cash 100000
2 Furniture purchased for cash 50000
3 Purchased goods for cash 30000
4 Sold goods of Rs 20000 for 25000
5 Sold goods on credit 5000
6 Purchased goods on credit 25000
7 Rent Paid 10000
 Problem No. 4
Show the Accounting Equation on the basis of the following Transactions:

Sr. No. Transactions Amount Rs.

1 Manu started business with cash 50000
2 Bought furniture for 500
3 Purchased goods on credit 4000
4 Sold goods on cash (cost Rs 500) for 700
5 Received Rent 200
6 Purchased goods for cash 1000
7 Withdrew for personal use 700
8 Paid to creditors 400
9 Paid for salaries 200
 Problem No. 5

Prove that the Accounting Equation is satisfied in all the following transactions of
Sameer Goel:
i. Started business with cash ₹ 10,000.
ii. Paid rent in Advance ₹ 300.
iii. Purchased goods for cash ₹ 5,000 and credit ₹ 2,000.
iv. Sold goods for cash ₹ 8,000 costing ₹ 4,000.
v. Paid salary ₹ 450 and salary outstanding being ₹100.
vi. Bought motorcycle for personal use ₹ 3,000.
 Problem No. 6
Show the Accounting Equation on the basis of the following transactions:
i. Sonia started business with cash Rs. 25000.
ii. Cash deposited into bank Rs. 15000.
iii. Purchased goods worth Rs. 4000 and paid by cheque.
iv. Purchased Equipment's of Rs. 2500.
v. Sold goods for cash Rs. 1200 (cost Rs. 1000).
vi. Sonia withdrawn Rs. 3000 for personal use in cash.
vii. Paid salaries Rs. 2500 and office rent Rs. 1200.
viii. Paid Telephone Bill Rs. 2000 by Cheque.
ix. Purchased goods worth Rs. 3000 on credit.
 Problem No. 7
Analyze the following transactions under the accounting equation approach.
i. Commenced business with cash Rs. 500000.
ii. Purchased goods Rs. 25000.
iii. Paid salary Rs. 10000.
iv. Sold goods costing Rs. 20000 at a profit of 25% on the cost.
v. Paid Salary in advance Rs. 2000.
vi. Introduced additional capital Rs. 10000.
vii. Purchased Computer Rs. 15000.
viii. Deposited Rs. 50000 into the bank.
 Problem No. 8
Create an Accounting Equations to show the effect of the above transaction on his assets,
liabilities and capital
(i) Commenced business with cash ₹ 50,000.
(ii) Paid in to bank ₹ 10,000.
(iii) Purchased goods for Cash ₹ 20,000 and Credit ₹30,000.
(iv) Sold goods for Cash ₹ 40,000 Costing ₹ 30,000.
(v) Rent paid ₹ 500.
(vi) Rent Outstanding ₹ 100.
(vii) Bought furniture ₹5,000 on credit.
(viii) Bought refrigerator for personal use ₹ 5,000.
(ix) Purchased motorcycle for cash ₹ 20,000.